The Federal Trade Commission (FTC) voted Tuesday to ban non-compete agreements between employers and employees, a move that is sure to face a legal challenge. The rule is slated to take effect 120 days after it is published in the Federal Register.
In general, non-compete agreements temporarily bar employees from working with their current company’s competitors after they leave their current company’s employ. Business groups call the agreements critical to protecting their proprietary information and intellectual property. The FTC disagreed in a statement about noncompete clauses being unfair to workers.
The FTC advanced the much-anticipated Final Rule during a Special Open Commission Meeting, approving the Rule in a 3-2 vote along party lines.
The Final Rule closely resembles the FTC’s original Proposed Rule banning non-compete agreements, with a notable exception that existing non-compete agreements with senior executives will not be invalidated by the new rule. The Final Rule defines “senior executives” as leadership-level employees earning more than $151,164 annually, and, in policy-making positions. As with the Proposed Rule however, the Final Rule generally prohibits non-compete agreements going forward, and further, invalidates most existing non-competes.
“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said FTC Chair Lina M. Khan. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”
The FTC estimates about 30 million people are under noncompete agreements.
Lawsuits Expected to Challenge FTC Decision
Business groups have already indicated they will sue to block the ban as early as this week. Legal challengers will argue that the FTC lacks the authority to prohibit non-compete agreements across all employers, and that such action can only be taken by Congress. Sean Heather, U.S. Chamber senior vice president for International Regulatory Affairs and Antitrust, said the following:
“Today’s actions by the Federal Trade Commission to outright ban noncompete clauses in all employer contracts is blatantly unlawful. Since the agency’s creation over 100 years ago, Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule. The Chamber is confident that this unlawful action will not stand.”
While a legal challenge to enjoin the FTC from enforcing the Final Rule might be imminent, the Commission’s approval of the measure is likely to spur additional conversation among state-level legislators and regulators. Numerous states, including New York, are still actively considering their own prohibitions on non-compete agreements.
Vote Comes After Much Discussion
The FTC’s vote comes more than one year after issuing its notice of the proposed rule on January 5, 2023. As we previously noted, the FTC’s proposed rule argues that most non-compete agreements are an unfair method of competition under Section 5 of the FTC Act (15 U.S.C. § 45).
The FTC held the proposed rule open for public comments through April 19, 2023 and reviewed the nearly 27,000 comments received during this period in preparation for voting on the finalized non-compete rule.
Harris Beach will continue to provide updates and information as it becomes available, and will provide more detailed analysis of the Final Rule in the coming days. Businesses should closely monitor the FTC’s and other government regulators’ non-compete initiatives.
